The significant restructuring of financial services firms’ operations and “changes in the international footprint of many firms” as a result of Brexit has been a driver for a new PRA consultation paper on its approach to the supervision of international banks (CP2/21). International banks (which include PRA-designated investment firms) are defined as those headquartered or being part of a group based outside the UK, and include firms operating in the UK through a branch. The CP was accompanied by a speech from David Bailey, Executive Director for International Banks Supervision, in which he describes the PRA’s approach as “responsible openness”.
International banks will welcome the predictability and certainty that flows from broad confirmation of the PRA’s existing approach. Equally, those who have just begin to operate under the post-Brexit temporary permissions regime (TPR) will appreciate the PRA’s pragmatic approach to timing. It does not expect firms that are in the TPR to meet these expectations immediately.
What stays the same?
The PRA’s approach to supervision remains consistent with its existing approach and the consultation (and the accompanying new draft supervisory statement (SS)) “largely consolidates” the existing approach and provides clarification or illustration rather than proposing any new requirements. The PRA continues its holistic approach but extends it to cover subsidiaries as well as branches and so the range of authorisation options available to international banks.
What has changed?
The number of firms to which this approach will apply has widened dramatically following Brexit. EEA firms operating in the UK that previously relied upon the European passport will be supervised using this approach for the first time. As at the end of October 2020, there were 66 former EEA firms pursuing authorisation to operate through UK branches and entering the UK’s TPR, as well as some former UK branches of EEA firms seeking UK subsidiary status. The good news for these firms, is that the PRA will not require immediate compliance with its approach, but only that firms comply as soon as practically possible. Pre-authorisation discussions will require firms to demonstrate how they will meet requirements by the time they exit the TPR to full authorisation. Further good news for subsidiaries of EU firms is that the pre-Brexit level of UK/EU supervisory cooperation and information sharing is similar to that expected in the future, thus preserving the existing supervision requirements.
International firms will welcome that the consultation consolidates and clarifies the PRA’s supervisory expectations for them in a single document, which covers subsidiaries as well as branches. In addition the approach is jurisdiction-neutral, so that all firms, whatever their home jurisdiction and whether EEA or not, are treated using the same approach.
In three areas, the PRA proposes to provide some additional detail for transparency reasons. However, it notes that these proposals are not new rather they are consistent with the supervision approach it has adopted for international firms to date and with its expectations of governance arrangements.
- Information sharing: the PRA expects “baseline information” to be available when requested from all international banks. This includes: information on the firm’s business model and any material changes affecting the UK entity or the group’s ability or willingness to support it; the financial resilience of the firm and its overseas parent or consolidated group; the operational resilience of the firm and its group; any material risks to the firm’s survival arising from the group (including enforcement or legal actions); and resolution planning. Additional information will be required for highly integrated or systemically significant businesses since the PRA needs to understand the global risk that is managed in the UK and what UK risks are managed abroad. Illustrative examples of expected additional information include: regular P&L reporting of global and local business lines or, for trading, timely information on business line performance; in addition, group-wide output from supervisory reviews or stress tests would be expected as would additional information on group operational resilience if global systems are used.
- Booking models: these should be set out in a clear rationale, be subject to adequate systems and controls (with responsibility allocated to a senior manager for firms with major trading activities), be subject to appropriate local risk management and not impede the firm’s recovery and resolution. In addition there should be a broad alignment of risk and returns at the entity level. The PRA does not prescribe particular booking models or require that a certain percentage of risk be managed locally.
- Systemic wholesale branches: the intensity of the PRA’s supervision will be greater and expectations of organisational arrangements will be higher. The Head of Overseas Branch will be required to be a senior figure within the firm, who is “credible and influential at the group level executive” and will be responsible for the provision of relevant information to the PRA. Systemic branches will need to consider whether to appoint a Chief Risk Officer, Chief Finance Officer and Chief Operations Officer or may be required to do so by the PRA. If a group individual has significant influence over the branch’s booking arrangements, that individual should seek authorisation as the Group Entity Senior Manager. Branches should establish and maintain adequate risk management policies and procedures at branch level, including the nature and amount of risk associated with business undertaken by the branch (or at group level, which identify how branch risks are to be managed). If a group has both a subsidiary and a systemic wholesale branch in the UK the PRA will expect the control of the division of risks between the two entities and the management of conflicts of interest to be managed appropriately.
The deadline for comments on the consultation is 11 April 2021 and the PRA expects to implement the policy in Q2 2021.